Stay-at-home mothers and carers will receive a full state pension for the
first time under a radical overhaul of the country’s retirement system, The
Daily Telegraph can disclose.

Millions of mothers who have chosen to take time out of work will no longer be penalised once they are pensioners, Iain Duncan Smith, the Work and Pensions Secretary, has announced.

However, the overhaul is expected to hit wealthier workers, as the state second pension will be scrapped.

At the moment, people who do not work for 30 years do not qualify for the full basic state pension. Under the reforms, mothers and carers will be treated as if they had worked throughout their lives, benefiting them by £2,000 a year.

Mr Duncan Smith said women would be the "major winners" in the reformed system, which will mean that everyone who works or looks after others will receive a flat-rate payment worth at least £140 a week.

The measure will be applied to women who retire from 2015, giving an average of £40 extra a week to mothers who took time out of work. Currently, they receive a reduced entitlement for each year out of employment.

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However, the changes will prevent people from "opting out" of the additional state pension and putting the extra money into a company scheme. They will not receive a discount in their National Insurance contributions, so the value of their pensions may fall.

Mr Duncan Smith defended the change, saying it would leave most workers better off and provide a far simpler system. He said the current system was "chaotic".

"Nobody understands how it works," he said. "It acts as a major disincentive to save. It penalises women, just for doing the most important thing in the world, which is to make sure that their families (are cared for)."

The Government will publish the full details of the pension reform in the coming weeks.

Mr Duncan Smith said: "This is hugely beneficial for women who have a broken record of employment. The really critical point is right now they don’t get recognised in the system. But under this system they could build up full points.

"So caring in itself will carry, for the first time ever, a value, and this will be of major benefit to women. Women will be the biggest single beneficiaries from this programme, massively."

The overall cost of the state pension will not increase, meaning other changes will be made to fund the reform.

Currently, workers can choose to either opt in or opt out of the state second pension. If they opt in and make National Insurance contributions for 30 years, they receive the basic pension of £107.45 plus their second pension, which can be worth more than £100 a week. Others with company or private pensions can choose to opt out. They, and their employers, gain a discount on National Insurance, and this money is invested in their own pension schemes.

Mr Duncan Smith has confirmed that this system will end.

Everyone will receive a higher pension of £140 a week, but people will not be able to opt out, meaning wealthier workers will potentially lose thousands of pounds each year.

The change will not be applied retrospectively, so people will still receive additional pension amounts they have already accrued.